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Your home may be many things. A place to raise your family. An opportunity to put down roots.
But one thing it is not is a great investment, according to Jonathan Clements, editor of HumbleDollar.com and author of “How to Think About Money.”
That’s because the price appreciation of a house is “pretty modest” — about 1% a year faster than inflation, historically speaking, he said.
Freddie Mac is forecasting home prices will grow 3.6% in 2019 and 2.6% in 2020. According to the latest figures from the Labor Department, the inflation rate as tracked by the Consumer Price Index is 2% for the 12 months ending in April.
“You put it all together and most people are not keeping up with inflation after costs, and they may even be underwater,” said Clements, who prefers the higher long-term rate of return of the stock market.
It’s something Ryan Guina knows about.
He and his wife lost $50,000 on their first home in Dayton, Ohio, in 2010, after the collapse of the housing market.
People are completely delusional when it comes to real estate.
editor at HumbleDollar.com
In 2019, they sold their home in the Chicago area for $3,000 less than they paid. However, Guina said their losses were actually closer to $25,000, when upgrades and the cost of the real estate transaction were factored in.
Luckily, they didn’t buy their homes to try to turn a profit — but they learned a valuable lesson. Now, Guina cautions against buying a home just to make money.
“An investment provides you a return on your cash,” said Guina, founder and editor of the website Cash Money Life. “Unless you are renting out rooms or otherwise earning cash flow from your home, it is a liability.”
“That doesn’t mean you can’t make money when you sell your home,” he added. “But even paper gains can be misleading, as you need to account for the cost of the transaction, the carrying costs leading up to the sale, and other factors.”
“People are completely delusional when it comes to real estate,” he said. “They boast about the type of price appreciation they have and they ignore the cost.”
Those costs include things such as property taxes, maintenance expenses and homeowners insurance.
There are also fees associated with buying the house, such as title insurance, mortgage-application fees and maybe private mortgage insurance. And then there is the mortgage interest, which alone could wipe out any gains you made, Clements said.
Certified financial planner Kelly Digonzini has a different take. She likes real estate as an asset class because it keeps up with inflation. She also thinks buying a house is the best way to build net worth over time.
However, her clients generally don’t usually look at their primary residence as an investment because they are living in it — and they don’t want to be forced to liquidate it at some point.
“The problem with thinking of your home as an investment at some point is you are basically assuming you are going to move,” said Digonzini, a senior financial planner with Beacon Pointe Advisors, based in Newport Beach, California.
“For some people, that is OK, if they know they are going to downsize at some point,” she added. “But for most people, they want to stay in their home.”
Being a landlord
Buying a home as a rental property is a different story and can be a good source of income.
However, it’s important to determine how much you are going to spend on the home, as well as the expenses you’ll incur as a homeowner, and then research what your income on the property will be to determine if it is a good investment, Digonzini said. If the return on investment is more than that of stocks and bonds, she’ll recommend it to her clients.
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Even Clements said he knows people who have done well owning rental properties. However, he’s not a big fan due to the fact that it is a “big undiversified bet” and there is a lot of work involved in being a landlord.
“I much prefer to invest in the stock market because none of my stocks have ever called me up in the middle of the night and complained that the toilet was broken,” he said.
Buying vs. renting
Just because your home may not wind up giving up a good return on your investment, it doesn’t mean you shouldn’t buy one, Clements said.
After all, you need a place to live and there are benefits to not paying rent if you plan to stay in the home a while.
“Anybody who has at least a five-year time horizon, and probably seven years or longer, should indeed look to become a homeowner,” he said.
For one, you lock in your housing costs instead of facing rising rents every year, he noted. It also forces you go save because every month you are paying down your mortgage and eventually you will own it “free and clear.”
Plus, owning is better for your net worth than renting, Digonzini pointed out.
“Your home is highly likely to increase in value over the long term, which will increase your net worth,” she said. “So, it is an asset.
“It’s almost your back-up plan.”
For his part, Guina isn’t shying away from home ownership, despite his earlier losses. He and his wife recently relocated to the Nashville, Tennessee, area, which has a booming real estate market.
“We may end up making money when we sell this home,” he said. “But we bought this home for quality of life reasons, not to make a profit,” he said.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.